Lessons from the Rock for Europe's banks

May 27, 2012|Steve Slater and Clare Kane | Reuters

Britain and other countries have made the rules on compensation less complex and more generous, and banks now regularly communicate that. Four years ago, only the first 2,000 pounds ($3,000) was fully guaranteed, and then 90 percent of the next 33,000 pounds ($52,000). Now it is 100 percent of 85,000 pounds ($133,000), and other European countries guarantee a similar amount.

Consumers are more financially aware. During Northern Rock's crisis, a branch manager was barricaded in her office after refusing to allow one couple to withdraw 1 million pounds. Deposits are now typically distributed across more banks.

As well as being attacked for a poor communications strategy, British authorities were criticized for a lack of contingency planning, weak coordination between the Treasury, the central bank and the regulator, and lax supervision.

Risks at Northern Rock had been identified in "war games" held in 2005, but steps to address weaknesses were not taken.

But Darling said the Northern Rock crisis did mean the government acted sooner and more decisively a year later when Royal Bank of Scotland was on the brink of collapse.

"We were determined that we would not let it happen again, and this time we were dealing with big global players ... we had no hesitation in taking the action we needed to do," he said.

SLOW RUN

Other banks have suffered runs before and since Northern Rock, and more will in future.

"If people think that their money might be at risk, it's entirely rational for them to take it out," Darling said.

In 1933, President Franklin Roosevelt took drastic action to halt a series of runs on U.S. banks, successfully calming savers with an effective 100 percent deposit insurance.

Greeks were last week rattled after the country's president said savers had withdrawn 700 million euros ($875 million) in one day. That prompted a similar amount to be withdrawn the next day.

The exodus slowed, and there has been no sign of panic or queues at branches in Athens. But there had already been a slow run on Greek deposits -- about 72 billion euros ($90 billion), or 30 percent, has been taken out since the start of 2010.

A bigger worry is that Madrid's banking crisis or a Greek euro zone exit could prompt an exodus from Spanish banks.

Shares in Bankia plunged last week after a report that 1 billion euros ($1.25 billion) had been pulled out by customers, forcing the government to deny the claim.

There has been no sign of panic in Spain, and the latest deposits data from its central bank showed a slight increase in March, although about 55 billion euros ($69 billion) has been withdrawn in the year to March, or 4.6 percent.

But Santander's British arm did see 200 million pounds ($300 million) withdrawn last Friday after it was included in a Moody's credit rating downgrade of Spanish banks.

Several local governments withdrew funds from Santander UK due to worries about its parent, Spain, or the euro zone, even though it is an autonomous subsidiary and is self-sufficient in capital and funding, showing the risk of a run is not just about retail customers.

Britain's local authorities are risk-averse after many lost millions of pounds held in Icelandic banks.

Plymouth City Council told Reuters it removed funds from Santander UK on Friday, while Kent, Oxford and Waltham Forest said they had taken out deposits and were reviewing the situation. John Simmonds of Kent County Council said he was reassured that capital could not be drained by its Spanish parent, but he was now "waiting for the fog to clear a little".

At least five more councils, including Westminster and Middlesbrough, told Reuters they had stopped depositing cash with Santander UK in the last two years, due to Spain and the euro zone concerns.

Unlike four years ago, there was a swift reaction to quell any panic, and the Financial Services Authority confirmed no money could be sent to bail out the parent. Santander UK said activity returned to normal the day after Friday's withdrawals.

With the euro zone crisis likely to drag on, there have been calls for a pan-European deposit scheme to reassure savers in countries like Greece. But that would fail to protect against currency risk and would probably face opposition in Germany, which does not want to pay for more problems elsewhere.

(Additional reporting by Jesus Algado in Madrid and Edward Taylor in Frankfurt; Editing by Giles Elgood)